For months now, the stock markets have focused largely on the debt crisis developments in the eurozone and, in the process, have ignored this country’s own debt and deficit issues.
The headline each morning would talk about the European debt crisis. The fiasco in Greece was front page. There are also the rising bond yields in Italy and its debt of about $2.5 trillion, but what the debt and deficit in America?
The U.S. national debt recently broke above $15.0 trillion; the debt situation is worsening. Something needs to be done and soon or the country’s financial strength will go down the toilet!
As a requirement to allow the debt ceiling to be increased to over $16.0 trillion, the Obama administration had to agree to cut around $2.0-$3.0 trillion off the deficit over the next decade in order to reduce the national debt. Heck, we are lucky that interest rates are low now or the mounting interest charges on the debt, which already make up the fifth largest component of the debt, will rise at a much faster rate and weaken the country’s financial strength.
A super-committee has been in heated discussions to come up with some sort of bipartisan agreement to trim the deficit by $1.2 trillion by the November 23 deadline. This did not happen, so the budget is now facing automatic deficit cuts of $1.2 trillion over the next decade. The question is: where will the cuts be from?
Take a look at the breakdown of the debt. The top six budgetary areas are: Medicare/Medicaid, Social Security; Defense/Wars; Income Security; Interest on the Debt ($218.35 billion!); and Federal Pensions.
We know that President Obama will save money after announcing that would pull out American troops from Iraq by the year’s end. This will help, but I hope there is not another war or conflict around the corner, or we will be in real trouble.
Where I think there will be additional cuts will be Social Security and possibly Federal Pensions. The reality is that cuts and an austerity plan are required. Greece, Portugal, Italy and Ireland are cutting back on spending or risk default. The U.S. is no different. You cannot go on and just print money and hope the debt problem goes away.
The problem is that the U.S. economy is in the renewal phase, so it is clearly not the best timing for cuts, albeit if the debt and deficit are not dealt with now, we would likely see further problems around the corner and a potential cut in the U.S. credit rating from the current AA+. Moody’s and Standard & Poor’s recently suggested that another rate cut was possible if the debt and deficit situation is not resolved.
The bottom line is that everyone knows what needs to be done, so let’s do it.
Did you notice the lack of Chinese IPOs coming down the pipeline? Read my thoughts in Chinese Reverse Merger Stocks Taking More Hits.
Black Friday is this week and it will be critical for the U.S. economy, as I discussed in Retail Sector—It’s Make or Break Time.